Small-business owners can use managerial accounting techniques to help guide business decision making. Managerial accounting is a system of accounting used mostly for internal decision making and is associated with a few primary tenets. By understanding these associations, you can leverage the strengths of this system of accounting for use in your small business.

Internal Focus

In contrast with financial accounting, managerial accounting tends to be focused on producing information that is relevant for internal users. For small businesses, this tends to be information used by a company manager or owner. Because of the internal focus of managerial accounting, managerial accounting reports can be effectively tailored to answer the questions that are most interesting to the owners of the company without having to ensure strict compliance with external financial reporting guidelines.

For example, under generally accepted accounting practices (GAAP) companies must allocate all costs of production to products. However, some of these costs are incurred whether any production takes place at all. In these circumstances, it may be more useful for internal users to exclude these costs; by using managerial accounting, owners have the flexibility to do so.

Not Required

Managerial accounting is not required by external regulators, creditors or lenders. While financial statements prepared in conformity with GAAP may be required of small businesses when applying for loans or other financing, managerial accounting-based statements are not required. This is because managerial accounting allows much flexibility in the assumptions and choices used to prepare managerial accounting reports. This reduces the comparability of the financial reports and the usefulness of the information to people outside the company.

Decision Making

The chief purpose of managerial accounting information is to aid internal decision makers in making informed and data-driven decisions using relevant financial information. Managerial accounting information focuses on relevant costs, which are defined as costs that differ between decision alternatives. This helps managers focus on costs that actually matter to a business and avoid decision traps. For example, a small-business owner may have invested $1,000 into development for a new product and found that a competitor has just completed a comparable product that will sell for less and have more features. When deciding whether to continue development, the manager should not consider the $1,000 already invested. This is a sunk cost and is incurred no matter what the manager decides about whether to continue.

Forward Focused

While financial accounting focuses on recording past transactions, managerial accounting is more future oriented. Because managerial accounting information is associated with decision making, it should be focused on helping make sound decisions with the best information available at the time. This means that under managerial accounting, accuracy of information can be less important than timeliness.

References

"Managerial Accounting": Ray H. Garrison, et al.

About the Author

John Freedman's articles specialize in management and financial responsibility. He is a certified public accountant, graduated summa cum laude with a Bachelor of Arts in business administration and has been writing since 1998. His career includes public company auditing and work with the campus recruiting team for his alma mater.